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Stepped into the income tax slab: Save with ELSS mutual funds

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Paying income tax is the legal and moral obligation of every citizen. As per Income Tax of 1961 failure the pay your correct tax obligation on time can attract penalties and interest or in some cases can even lead to imprisonment. Even if your employer deducts tax from your monthly salary, the final responsibility of fulfilling your tax obligation lies with you.

Your salary may not be your only taxable income; interest earned on your fixed deposits, rental income from your property, profit on sale of shares and mutual funds, your savings account interest (if it is beyond Rs 10,000 in a year), other interest income etc. are all taxable income and should be accurately declared in your income tax return.

As per the income tax slab, if your tax liability exceeds Rs 10,000 then you should pay advance tax in each quarter based on the estimated tax liability for the financial year. If you do not pay advance tax quarterly, you will have to pay interest on the late payment.

If you have joined the work-force then you should know the different income tax slabs and the applicable tax rates, so that you can calculate how much tax you have to pay. The table below shows the income tax slabs applicable for the Assessment Year 2018 – 2019, Financial Year 2017 – 2018 for taxpayers who are below 60 years of age. Even existing tax payers should note the tax slabs carefully because they have been changed in the last Budget.

A surcharge of 10% on income tax is applicable where income exceeds Rs 50 Lakhs but is less than Rs 1 crore. A surcharge of 15% on income tax is applicable where income exceeds Rs 1 crore. A Cess of 3% is applicable of income tax plus surcharge.

Even if you are a senior citizen and have no salary income, you may be required to pay income tax, if the income from your assets e.g. interest income from fixed deposit or small savings schemes, rental income from property exceeds the exemption limit. he table below shows the income tax slabs applicable for the Assessment Year 2018 – 2019, Financial Year 2017 – 2018 for senior citizen taxpayers who are above 60 years of age, but below 80 years of age.

Let us now understand how you can calculate your income tax liability.

Suppose your gross taxable annual salary is Rs 600,000 and you are not a senior citizen.

The first Rs 250,000 of your income is tax exempt. The income from Rs 250,000 to Rs 500,000 will be taxed at 5%. So up to Rs 500,000 of your income, your tax liability is Rs (500,000 – 250,000) X 5% = Rs 12,500 according to the income tax slab.

Income above Rs 500,000 to Rs 1,000,000 is taxed at 20%. Your income above Rs 500,000 is Rs 100,000; your income tax liability will be = Rs 12,500 + 20,000 (Rs 100,000 X 20%) = Rs 32,500. A Cess of 3% is charged on your income tax. So your total tax liability will be = 32,500 X (1+3%) = Rs 33,475.

Your employer will deduct taxes from your salary. You can get the TDS (tax deducted at source) details from the Form 16 statement issued by your employer and see how much tax your employer deducted from your salary. The balance tax obligation (after subtracting the taxes deducted at source) should be paid to the Government either by going to the Income Tax Department website or to your bank website (if they have e-tax payment facility) or by taking help of a tax consultant.

So far we have discussed how you can calculate your tax liability according to your income tax slab. However, under section 80C of the Income Tax Act of 1961,tax payers can claim deductions from their gross taxable income by investing Rs 150,000 in a year under various schemes allowed in this section.

Going back to the previous example, if you invested say Rs 100,000 in an 80C investment scheme, you can deduct your investment amount from the gross taxable income, which was Rs 600,000. Therefore, your net taxable income would be Rs 500,000. Your income tax liability before Cess would then be = Rs 12,500 only according to your income tax slab. You can see that, you will save Rs 20,000 in taxes by investing in a Section 80C investment option.

Investments allowed in Section 80C of Income Tax Act are Employee Provident Fund (mandatory for most employees), Public Provident Fund (PPF), National Savings Certificates (NSC), Senior Citizens Savings Schemes (for senior citizens only), SukanyaSamriddhi Yojana (for girl child), 5 year tax saver bank and post office FDs, life insurance premiums and mutual fund ELSS schemes.

Mutual Fund ELSS or tax saver funds are market linked investments and therefore, they are subject to equity market risks. However, ELSS has the maximum wealth creation potential for investors in the long term. Historical data shows that, equity as an asset class has given the highest returns compared to other asset classes over a long investment horizon. Over the last 5 years, the Sensex gave 12.65% annualized returns, while bank fixed deposit only 6.3% annualized returns. Even over a longer time frame like 10 years or 20 years, stocks outperformed FDs and gold.

In the last 5 years top 10 ELSS Funds have given 16% to over 19% annualized returns which is far high than other investment option in Section 80C.

ELSS is also the most tax friendly 80C investment, let us see how –

  • Long term capital gains in ELSS are tax free

  • Dividends paid by ELSS Funds are also tax free whereas incomes from 80C investments like NSC, Senior Citizens Savings Schemes (SCSS), tax saver FDs etc. are taxable.

  • Mutual Fund ELSS is the most liquid of all the 80C investment schemes. ELSS funds have a lock-in period of 3 years after which you can redeem units of ELSS partially or fully at any time. The lock-in period of other 80C investments is much longer – at least 5 years for all 80C investments except ELSS. In case of PPF the lock-in period is 15 years

In this blog we discussed the various income tax slabs. We also discussed how to calculate your tax liability. Section 80C of Income Tax Act allows taxpayers to claim deductions from their taxable income by investing in certain eligible schemes. We also discussed that ELSS mutual funds is the most suitable tax saving investment option from the point of view of wealth creation, tax free returns and superior liquidity. Investors should make ELSS investments their preferred choice for saving taxes.

See which are the top 10 ELSS Funds




Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director
Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.

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